Capital Gains on the Sale of a Personal Residence
Some of you may be considering selling and moving to lower cost regions of the country; while others are using the equity to trade up to larger homes. Whatever the reason for selling your home, you should be aware of the tax implications and how to avoid hefty capital gains taxes in these times of great home appreciation.
Currently section 121 of the Internal Revenue Code allows an exclusion of up $250,000 of the capital gain on a principal residence for single taxpayers and up to $500,000 for a married couple filing jointly. To qualify, the taxpayer must own and use the home as a principal residence for at least two of the past five years prior to the sale. The ownership and use periods do not need to be concurrent. The two years must consist of 24 full months or 730 days.
What happens if you have lived in your primary residence for less than two years and need to sell your home? The IRS has allowed certain exceptions to the two year rule.
Job Relocation: Job relocation is defined by IRC 121 simply as “a change in the place of employment” for the purposes of a partial exclusion of gain from the sale of the home. An exception is permitted if the new job site is located at least 50 miles farther from the old home than old the workplace was from that home.
Health: An exception is permitted if the primary reason for the move is related to disease, illness, injury or if a physician recommends a change in residence for health reasons. In addition, a qualified person for health reasons includes close relatives, so that sales related to the caring of sick family members may qualify.
Other Unforeseen Circumstances: In addition to job relocation and illness, unforeseen circumstances may include the following:
§ Death,
§ Divorce or legal separation,
§ Unemployment, change in employment that leaves the taxpayer unable to pay the mortgage or reasonable living expenses,
§ Multiple births from the same pregnancy,
§ Damage resulting from natural disaster or man-made disaster, or war or acts of terrorism,
§ Condemnation or seizure or other involuntary conversion.
Reduced Exclusion Calculation: Prorated exclusion of gain is based on the number of days the homeowner meets the ownership and use of requirements, and the number of days between the most recent sale of a home using the Section 121 exclusion and the current sale.
Example: Bill and Sue purchased their new home in San Diego on October 1, 2002. Because of job relocation to Dallas, they sell their home on December 31, 2003. Under section 121, they qualify for a pro-rata exclusion calculated as follows:
Number of days owned and used as main home 456 456
Divide by 730 (days in a two-year period) .62
Times $500,000 maximum exclusion $310,000
Bill and Sue can exclude up to $310,000 of gain on a house they owned for 15 months.
The foregoing was not intended to replace qualified legal or tax advice. Every homeowner should review their case with their own legal and tax counsel. Complete details regarding IRC 121 are available at www.irs.gov.
Source: IRS Publication 523
About the author…Marla Trussell, MBA is a Howell resident and Realtor® with Coldwell Banker in Spring Lake in Olivenhain. If you are interested in selling your home, please contact Marla at (732) 600-8743 or at www.marlatrussell.com.
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